JGB futures slip from 2-month peak before auction

By Rika Otsuka

TOKYO, March 1 (Reuters) - Japanese government bond futures edged down on Monday, slipping from a two-month peak hit last week, as investors sold bonds to make room in their portfolios before an auction of benchmark 10-year notes the following day.

The Ministry of Finance will offer 2.2 trillion yen ($25 billion) of 10-year bonds on Tuesday. The debt sale is seen as an important test of demand after the 10-year yield last week dipped below the 1.3 percent threshold for the first time this year.

'Selling ahead of tomorrow's auction is hurting JGBs in light trade,' said Atsushi Ito, a fixed-income strategist at Morgan Stanley.

But overall, investor demand looks strong and there are no factors that will boost bond yields sharply higher, Ito said.

'The market has formed a consensus that JGB yields will stay at the current low levels for a while, with fears receding that the government will rush to compile a supplementary budget (which could boost JGB issuance),' he said.

March 10-year JGB futures were down 0.10 point at 139.77 . On Friday, the lead contract rose as high as 140.05, its highest since late December.

The benchmark 10-year yield rose 1.5 basis points to 1.310 percent, having risen from a two-month low of 1.290 percent hit on Friday.

Risk aversion in the wake of sovereign credit concerns in the euro zone was one factor that lifted JGB futures to a two-month high.

Expectations the Bank of Japan could further ease monetary policy to support Japan's deflation-plagued economy have also helped lift government bonds.

BOJ Governor Masaaki Shirakawa told a lower house financial committee on Monday that the most important monetary policy goal was to pull Japan out of deflation and achieve sustainable economic growth.

Separately, Banking Minister Shizuka Kamei said on Monday that the BOJ should buy government bonds directly from the MOF to finance government spending.

The market showed muted reaction to Kamei's comments as Tuesday's auction remained the key focus for investors.

The five-year yield edged up 0.5 basis point to 0.500 percent , while the 20-year yield rose 1 basis point to 2.130 percent.

The five-year/20-year yield spread stood at 163 basis points, staying near 167 basis points reached in February, its steepest in a decade according to historical data on Reuters EcoWin.

(Editing by Chris Gallagher)

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